Monitoring goals and targets can help avoid the financial uncertainty of receivership 

Dotan Y. Melech

Cannabis receivership typically takes one of two paths. In some cases, it enables distressed cannabis businesses to rebound and become solvent. But when that’s just not possible, it’s an avenue to organize and liquidate assets for creditors and / or investors to recoup some value.

Since businesses in this industry cannot declare bankruptcy due to longstanding federal illegality of cannabis, receivership is often the last resort for business owners to try to get something out of their enterprise before it shuts down for good. And that is exactly what a receivership should be—a last resort. 

Receivership is a powerful and often necessary tool, but with a defined operations strategy, financial monitoring and targeted goals, it’s possible to avoid a receivership involving litigation and the courts—not to mention the substantial effort and emotional strain that comes with it.

Avoiding the Courts

Entering the legal space and involving the courts is expensive and time consuming. How much the cost might be and the amount of time involved are unknown because of the many legal mechanisms—such as appeals and temporary restraining orders—that prevent business operators from being able to budget and control costs in such an uncertain environment. 

Engaging with law firms, lawyers and courts opens the door for people who might not necessarily be operating in alignment with the goals of the business. Once the court is involved, all parties are subject to what it decides or does not decide. Creditors, investors and operators can find their options severely restricted, to the further detriment of the distressed business.

Cannabis Monitoring Best Practices 

The ability to recognize when your cannabis business is in distress and not just a temporary downturn is critical to avoiding legal proceedings with creditors and will save untold time, resources and money. 

Once the issues are acknowledged, careful monitoring of the business should provide insight into what is going wrong. Does the packaging need to change? Is it a sales strategy issue? Are SOPs up to date? Are your cannabis genetics not up to par? An independent fiduciary and cannabis operations expert can be beneficial at this stage to look out for the best interests of the business owner and help address and resolve deficiencies or misalignments before they become a major problem. Cannabis monitoring allows the operators to take a pause and bring in a new perspective to identify what might not be visible or obvious from an internal lens. 

This independent analysis will provide the foundation for creating a model that can be monitored and used to alert debt holders, creditors, investors and other outside financial sources that there is a plan in place to maximize the value of the assets of the company. 

Self-monitoring can work, but it is far more successful when guided by the direction of an objective, outsourced third party. This risk mitigation should be handled with a critical eye and identify issues that are not working and problems that must be addressed immediately. It will allow resources to be focused effectively on the areas of most concern and transition to a type of operational maintenance that will allow what works to continue to work. 

Creditors often lose faith in distressed businesses, and in order to avoid receivership and the threat of lawsuits due to broken promises and targets not hit, an open and realistic model with new perspectives is essential. Without transparency about the problems and the proposed solutions, animosity and tension can infiltrate, and the need for receivership will increase.

Effective Cannabis Maintenance

Once the model is created to move the distressed business toward the best possible outcome, it must be executed by those still running the business. A concrete strategy that follows a structured method is critical to keeping creditors and investors from aggressive or even adversarial tactics in their own self interest. Under a new strategy with proper monitoring and management, the business may even be able to attract important new investments to support a return to solvency, expand operations, and ultimately, achieve profitability. In the case of an operation that can’t be turned around, these services can help create a path towards a more equitable termination of the business as it moves toward liquidation of assets.

A court-ordered receivership of a cannabis business often leads to dissolution or restructuring, but will do so with high financial costs and extensive time commitments. 

A transparent strategy of preventative maintenance and careful business monitoring can reassure investors and creditors and allow ownership to address issues, change formulas and alter variables to best benefit the distressed company. The right plan gives management and capital sources the ability to communicate and establish a path to compromise that will avoid the need to involve the Courts. 

To access expert cannabis risk mitigation guidance, reach out to United CMC today. Our experienced team is here to help.